Trump’s 50% EU tariff threat could cause economic damage beyond Europe

LONDON – Is it a negotiating tactic, a credible threat or a howl of rage?

US President Donald Trump’s threat to

impose a 50 per cent tariff on all goods

coming into the United States from the European Union starting next weekend was the latest zag after several zigs on trade policy that have befuddled financial markets, businesses and political leaders around the world.

“No one was expecting this,” said Ms Agathe Demarais, a senior policy fellow at the European Council on Foreign Relations. “We essentially don’t have a clue as to what it means.”

Whatever the strategy – or lack of one – the economic fallout on the American, European and global economies will be severe if Mr Trump follows through.

Mr Carsten Brzeski, chief eurozone economist at Dutch bank ING, warned that such tariff levels could lead to a dreaded combination of higher inflation and slower growth in the US. Europe could be pushed into a recession, and global growth would fall.

At the Kiel Institute for the World Economy, trade researcher Julian Hinz calculated that US economic growth would drop 1.5 per cent.

The magnitude of this latest tariff jolt is significantly higher than the 20 per cent “reciprocal” tariff that Mr Trump announced for the EU in April and later paused. (That figure would have been added on top of an across-the-board global tariff of 10 per cent.)

Many analysts said Mr Trump’s announcement was clearly a bid to pressure Europe, a region that he has treated with particular scorn. Yet they agreed that the US President’s announcement had caused damage.

The scale of the increase in tariffs, the capricious manner in which they were threatened and the growing size of US budget deficits are unsettling financial markets, said Mr Neil Shearing, chief economist at Capital Economics. A week earlier, Moody’s downgraded the US credit rating, citing concern over Washington’s ability to limit rising debt levels.

“This all points to concerns about policy direction in the US lacking credibility,” Mr Shearing added, and that the “guardrails are coming off”.

Companies across the board are already raising their assessments of the riskiness of investments in the US, a sign that uncertainty is dimming the allure of investing in America, said Ms Mary E. Lovely, an emeritus professor of economics at Syracuse University.

“One of the President’s big goals is to increase investment,” she added. “But who wants to do manufacturing here when the President at any moment might put high taxes on things that you buy to produce, and you might be subject to retaliation from the markets into which you will sell?”

The shift between oversize threats and reversals has become familiar. Mr Trump imposed high global tariffs and then quickly postponed them when the bond market shuddered. He threatened China with exorbitant tariffs of 145 per cent. When China hit back with a 125 per cent tariff on US goods, Mr Trump took a step back. Two weeks ago, the two governments issued joint statements that they would suspend the highest tariffs for 90 days and negotiate.

That experience is likely to bolster Europe’s resolve. “We’ve already seen what’s happened with China, which is that he climbed down,” said Mr Maurice Obstfeld, a senior fellow at the Peterson Institute for International Economics and a former chief economist at the International Monetary Fund.

If you hit back hard, markets will get nervous, and Mr Trump will back off. “That’s the message” that the Europeans have absorbed, he added.

But as several analysts pointed out, it’s hard for the Europeans to negotiate when Mr Trump has not made it at all clear what he wants.

And the notion that Europe could be pressured to quickly make concessions shows a deep misunderstanding of what it takes to reach a consensus among the EU’s 27 very different members.

Still, European officials have prepared a raft of countermeasures in response to higher US tariffs. Roughly a fifth of EU exports go to the US, and about the same share of American exports go to the European Union.

“We’re playing for big stakes here,” Mr Obstfeld said. “There’s the ability of both sides to do substantial damage to the other.”

In addition to wide-ranging tariffs on automobiles, food items and automobile parts, the EU has threatened to put tariffs on the American services sector. That is a serious vulnerability since service industries like technology, finance and travel make up the bulk of the US economy and European consumers are major users of them.

If Mr Trump does end up imposing 50 per cent tariffs on June 1, Ireland – the European country with the most trade with the United States – would be hit the hardest, with an estimated 4 per cent decline in total economic output, according to Capital Economics. Germany’s gross domestic product is projected to shrink by around 1.5 per cent, Italy’s by 1.2 per cent, France by 0.75 per cent and Spain by 0.5 per cent.

To some degree, the policy swings coming out of the White House may simply depend on which adviser was the last to speak to the President, said Mr Mark Blyth, a political economist at Brown University.

Given Mr Trump’s repeated claim that the EU has long been “ripping off” the US, it’s worth remembering that in 2008, both had the same size economies, Mr Blyth added.

Now, Europe’s economy is one-third smaller. “How can you be ripping someone off”, Mr Blyth asked, “if you’re a third poorer than them?” NYTIMES